Wednesday, March 10, 2010
8:07:20 PM EDT

Financials Help Stocks To Another Winning Day

by
Todd Shriber

Another one of those infamous sell programs kicked in late in during Wednesday's trading session and had that not happened, the day's gains would have been a bit better. In spite of the sell-off that actually turned the Dow Jones Industrial Average negative for a few minutes, all three major U.S. indexes notched small gains on the day. The Dow gained almost three points to finish the day at 10,567.33 while the S&P 500 continued to inch toward the critical 1150 level by tacking on just over five points to close at 1145.61. The Nasdaq continued to be a stalwart, gaining 18.27 points to close at 2358.95.

Market Stats Table

The Nasdaq's leadership, which started in 2009, has been something to behold, but on a day when so there was so much attention paid to the Nasdaq's performance over the last decade, it might be worth delving a little deeper into the situation. There was an interesting comment on CNBC today that despite tech's run-up, many of the Nasdaq's marquee names now hold market caps that are nowhere close to where they were in 2000 before the tech bubble burst.

Back in its heyday, Microsoft (MSFT) had a market value north of $600 billion. Today it closed with a market cap of $254 billion. Yahoo (YHOO) was once worth over $145 billion. The Internet search provider's market value is now below $24 billion. Intel (INTC) has seen market value pared by more than 50% in the past decade.

Making a long story short, the Nasdaq has been no place for the long-term, conservative investor. The chart I have included below is obviously dated (it illustrates the index's performance for 1999-2003), but it does highlight a couple of startling facts about the Nasdaq. For starters, the Nasdaq is not even up 20% since 2003. And while most investors probably have noted the Nasdaq's strong performance as of late and are wondering where the next support and resistance areas are, the bottom line is they are no where near the previous high of almost 5000 set a decade ago.

Nasdaq Chart 2000-2003

Moving on from today's history lesson to what was actually happening in the market today, financials, the speculative ones and the higher-quality names, continued to move higher. S&P 500 financials rallied for the ninth consecutive day, good for their best streak in 12 years, according to Bloomberg News. It should be noted that some of this is a sequel to the ''dash for trash'' theme that was prevalent at certain points last year.

As Jim mentioned yesterday, massive volume has been pouring into the likes of American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE) over the past few days. I am personally reluctant to lump Citigroup (C) in with these names because I think the bank survives and eventually thrives to some extent, albeit a lesser one than what was scene during its heyday. Either way, of the 10 most heavily traded issues today, five were either bank stocks or financial ETFs. Citi was the volume leader by a long-shot with over 1.2 billion shares traded. Bank of America (BAC) was next at 222.5 million shares, nowhere near Citi's volume.

AIG enjoyed another stellar session, gaining nearly 11% as volume soared to over 70 million shares, more than five times the daily average. The stock is now up 45% in the past five days. I know I mention AIG somewhat frequently and I should note that I hold no personal animosity toward the company or the stock, but Jim made an excellent point yesterday and that is that AIG is a heavily shorted stock and short covering is likely the primary catalyst behind this recent rally. No, Uncle Sam is not going to let this company fail, but once the short covering abates, it is hard to get around the fact that AIG is parting with some of its best businesses to repay its government loans and that leaves investors with little reason to be long this stock for anything more than a few days.

AIG Chart

As I mentioned earlier, the rally in financials was not contained to the dubious names. The wealth was spread to the group's more solid constituents, but it can be argued that the rally in bank stocks of any type today was itself dubious after a report in the Financial Times said U.S. regulators have told banks to hold off on raising dividends or repurchasing shares until the economy improves.

Most, if not all of the major banks, should be profitable in 2010. Even Citi has said it will be, but investors were really not expecting an imminent dividend hike there. On the other hand, JPMorgan Chase (JPM), the second-largest U.S. bank, continues to be a thorn in the side of its own shareholders. The bank could easily afford a dividend increase and has been cautious to the point of refusal on the subject. Now the government will not allow it. Still, JPMorgan, a Dow component, traded higher by 1.2% today.

Goldman Sachs (GS), flush with mounds of cash, is another bank where shareholders are clamoring for compensation in the form of dividends and/or buybacks. Goldman has not obliged and now will be prevented from doing so for the time being, yet the stock traded above $170 today for the first time in two months. The same sentiments apply to the likes of Bank of America and Wells Fargo (WFC), both of which were higher today and despite the gloomy outlook for bank dividends, the Financial Select SPDR (XLF), the ETF that tracks all of the aforementioned bank stocks, looks like it is breaking out to the upside.

XLF Chart

In economic news, the Commerce Department said on Wednesday that businesses reduced wholesale inventories in January even though sales were higher for a tenth straight month. Inventories fell 0.2% in January after declining by 1% in December. Sales rose 1.3% in January good for the best gain since November. Inventories have declined for 13 straight months and 15 out of the past 17 months, according to the Associated Press.

Dwindling inventories could be a good sign for the economic recovery because businesses will need to restock at some point, particularly if sales continue to drift higher. The ratio of inventories to sales now resides at 1.10, its lowest point in 18 years. Wholesalers hold 25% of all inventories, manufacturers hold a third and retailers hold the remaining supply, the AP said.

Inventories/Sales Chart

There was some curious news out of China today that will not do anything to quell concerns that the economy there is close to overheating. Consumer prices in China rose 2.5% in February while producer prices jumped 5.1%, the biggest increases in 16 months. Beijing has already shown that it has no problem with tightening monetary policy and if another such move is made, that is likely to spook to both equity and commodities investors.

China also said that exports rose 46% in February and imports jumped 45%. The imports number is not alarming and one can surmise that a healthy portion of those imports are commodities and energy-related, but the export number may be a bit more questionable. China's trade surplus soared to $7.6 billion in February, but the primary end markets for Chinese exports are the U.S., the U.K., the European Union and Japan. The point is business and consumer spending in these markets has yet to improve in a meaningful way and that could mean Chinese exports either trail off later this year or that Chinese exporters are currently selling goods at a loss.

China Exports/Imports

The China news failed to noticeably boost emerging markets ETFs, but the iShares MSCI Emerging Markets Index (EEM), the most heavily traded emerging markets ETF, did trade higher by 0.70% to close at $41.50, its best closing price in nearly two months. The chart below indicates EEM does not have much in the way of interference between where it currently trades and its January peak of $43.47.

EEM Chart

In the fertilizer sector, do not hold your breath, but it appears that the M&A drama has been so prevalent in the sector over the past year may be drawing to a close. That is it may be drawing to a close for the love triangle turned love square comprised of Agrium (AGU), CF Industries (CF), Terra Industries and Norway's Yara International.

Terra Industries looks poised to finally run to the altar with CF, which had tried to acquire Terra for months before throwing in the towel only to see Terra agree to a $4.1 billion bid from Yara. CF recently bested that offer with a $4.7 billion bid that Terra has said it will accept. Yara has five days to make a superior offer, but the company previously said it does not want to get into a bidding war for Terra. If CF is the ultimate victor for Terra, Agrium could be left out in the cold. The Canadian fertilizer maker has been trying to acquire CF via a hostile bid for over a year and may be forced to scuttle its bid should CF acquire Terra. The real winners are Terra shareholders as the chart below indicates.

Terra Industries Chart

Looking at the charts, it appears that 10,550 may be emerging as support for the Dow, though I would bet 10,400 is the firmer area. There still is not much in the way resistance between today's close and the 10,725 area. We would probably be even closer to that number if not for these late day sell offs. On the other hand, buyers have been there to prop the market up so the sell programs are not having a meaningful impact.

Dow Chart

The S&P 500 continues its march to 1150 slowly but surely. As I mentioned on Monday, when the index reaches this level, it would do well to break through that area with some gusto rather than closing at 1150 and some change. A stall at 1150 represents a double top and an opportunity for the bears to shave 20-30 points off the index.

S&P 500 Chart

The Apple (AAPL)/Research In Motion (RIMM)-driven Nasdaq rally continues and there might be some resistance in the 2370-2380 area, but the next major hurdle to clear is 2400. It should be noted that the Nasdaq is looking a tad overbought at this point, at least according to the RSI and Stochastic indicators on the daily chart. One encouraging element to the Nasdaq's rally is that it is not all about Apple and the other usual suspects. The Nasdaq Biotech Index (IBB) closed at an eight-month high today as M&A rumors continue to spark that sector higher.

Nasdaq Chart

I do not think much has changed since Monday, though I would add biotech to the list of sectors that deserve a closer look. I would be cautious if the S&P 500 does not traverse 1150 in impressive fashion and wait to see if a dip from there is again bought.